Hi Roger, see if this helps; the initial values are different, so just replace them with yours:
Finland furniture manufacturing makes two models of office chairs: regular and deluxe. summary data for the two products showed the following:
unit costs regular deluxe
Direct materials $65 $105
direct labour($20 per hour) 10 20
manufacturing overhead 4.80 9.60
Under the company's current costing, manufacturing overhead is allocated on the basis of direct labour hours. The overhead of the year follows:
materials handling $300000
setups 400000
general factory overhead 500000
total $1200000
The following table presents the activity levels that relate to the overhead costs:
cost driver regular deluxe total
#of parts 600000 900000 1500000
# of setups 75 50 125
direct labour hours 45000 80000 125000
the market price for the regular chairs is $104 with expected sales of 40000 units. The company expects to sell 25000 deluxe chairs at a selling price of $170 per unit.
Required
Determine the unit gross profit for the deluxe chair using both traditional and activity based costing methods
(20 marks)
Solution:Traditional Costing
Deluxe
Unit Gross Profit $ 35.40
Activity Based Costing
Deluxe
Unit Gross Profit $ 18.60
Explanation:Steps and calculations are below presented;
Activity Based Costing
Activity Rate= Ohs/Total activity
Activity Cost Pool Cost Driver Overheads Total Activity Activity Rate
Materials handling # of parts $300,000 1,500,000 $0.20
Setups # of setups $400,000 125 $3,200.00
General factory Ohs DLHs $500,000 125,000 $4.00
Allocation of Ohs
Activity Cost Pool Activity Rate ......Activity Used....... Overheads allocated
....................... ............ Regular Deluxe Regular Deluxe
Materials handling $0.20 600,000 900,000 $120,000 $180,000
Setups $3,200.00 75 50 $240,000 $160,000
General factory Ohs $4.00 45,000 80,000 $180,000 $320,000
Total Ohs allocated ............ ............ ............ $540,000 $660,000
Total units ............ ............ ............ 40,000 25,000
Per unit Ohs allocated ............ ............ ............ $13.50 $26.40
Traditional Costing
Description Regular Deluxe
Per unit selling price $104.00 $170.00
Direct materials $65.00 $105.00
Direct labor $10.00 $20.00
Mfg. Ohs $4.80 $9.60
Total unit cost $79.80 $134.60
Unit Gross Profit $24.20 $35.40
Activity Based Costing
Description Regular Deluxe
Per unit selling price $104.00 $170.00
Direct materials $65.00 $105.00
Direct labor $10.00 $20.00
Mfg. Ohs $13.50 $26.40
Total unit cost $88.50 $151.40
Unit Gross Profit $15.50 $18.60
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